Business Use of Home

If a sole proprietor uses their home for business and meets the use test defined by the IRS, they may be able to deduct their business-use percentage of certain expenses on Form 8829. Similarly, employees of businesses may be able to deduct the business use of their home (subject to the 2% of AGI limit) on Form 2106 or directly on Schedule A, if they meet the use test and the business use of their home is for the convenience of their employer. Do you think you qualify for either of these home office deductions?

To qualify for the home office deduction, the taxpayer must use an area of the home for business regularly and exclusively:

  • As the principal place of business (including administrative use);
  • As a place to meet with clients in the normal course of business; OR
  • In connection with the business if it is a separate structure not attached to the taxpayer’s personal residence.

Regular use means that the area is used for business on a continuing basis (i.e., occasional or incidental business use does not meet the regular use test, even if the area in question is used for no other purpose). Exclusive use means that the area of the home used for business is not used for any other reason. Any personal use of the business area of the home, no matter how small, will result in failing the exclusive use portion of the use test.

If a sole proprietor meets the use test, they can then deduct the business-use percentage of direct and indirect expenses against their business income subject to certain limits. The percentage of direct and indirect expenses they can deduct can be calculated using any reasonable method, including:

  • Total number of rooms used versus total rooms (if all are of comparable size); and
  • Percentage of floor space used for business versus total floor space of the home.

The benefit of claiming a home office deduction can be significant, particularly for businesses that do not have a “store front.” Expenses which can be deducted include mortgage interest, property taxes, casualty losses, home repairs and maintenance, rent, utilities, homeowner’s insurance, depreciation and several others.

Contact Flexible Accounting Services of the Triangle and let our experienced professionals assist you in maximizing your deductions and minimizing your income tax expense.